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HOT: Fed Prez Spills the Beans on the Excess Reserve Inflation Time Bomb

For the second time in two weeks, Philadelphia Fed President Charles Plosser is warning about the time bomb that is excess reserves.

I first reported on this last week, exclusively in the EPJ Daily Alert. I wrote:

Here’s something very big. There has been very little coverage in mainstream media about the Fed super-money printing and how much of it is going into excess reserves. But what if it doesn’t go into excess reserves and instead ends up in the system bidding up prices?

While mainstream media is pointing at Bernanke’s QE3 and not reporting beyond that, the Fed knows it is all about where the money they print ends up.

Here’s part of a very important interview Philadelphia Fed President
Charles Plosser gave yesterday to MNI News. It spills the beans:

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Plosser also warned that QE3 “could be highly inflationary.”

“I don’t think it would occur immediately,” he said. “Inflation is going to occur when excess reserves of this huge balance sheet begin to flow outside into the real economy. I can’t tell you when that’s going to happen.”

“When that does begin if we don’t engage in a fairly aggressive and effective policy of preventing that from happening, there’s no question in my mind that that will lead to lots of inflation.”

Bernanke and other Fed officials have often said that the Fed will be able to contain the outflow of reserves into the economy and thereby limit wage-price pressures by raising the rate of interest it pays on excess reserves. But Plosser said the IOER and reserve draining tools cannot be relied upon.

“How fast will we have to do that (raise the IOER)?” he asked. “How rapid will it have to go up? We don’t have a clue. Raising the IOER where you have a trillion and half or two trillion dollars in
reserves, we have absolutely zero experience with it.”

“We have the tools to do it, but we don’t know the consequences of the tools,” Plosser said.